ACCA Financial Management (F9) Certification Practice Exam

Which of the following is NOT a main aspect of factoring?

1. Administration of invoicing

2. Providing cash flow forecasting

3. Credit protection

4. Making payment to the client in advance

The correct answer is: Providing cash flow forecasting

Factoring is a financial transaction where a business sells its accounts receivable to a third party, known as a factor, at a discount. The primary purpose of factoring is to improve cash flow and provide immediate funds for operations. The key aspects of factoring typically include the administration of invoicing, credit protection, and making payments to the client in advance. The administration of invoicing involves the factor managing and handling the sales ledger and invoicing process for the selling business. This allows the business to focus on daily operations without worrying about the collection of receivables. Credit protection is another vital aspect, as factors often assess the creditworthiness of the business's customers. This process helps to mitigate the risk of bad debts because the factor typically assumes the risk of non-payment by the customer. Additionally, making payments to the client in advance is a fundamental feature of factoring. The factor usually provides an upfront payment to the company based on the receivables sold, which aids in immediate cash flow. In contrast, providing cash flow forecasting is not a main aspect of factoring itself. While factors may offer insights into cash flow patterns as part of their service, this activity is often a broader consideration for financial management rather than a direct function of the factoring process.